governance, political economy, institutional development and economic regulation

Imagine if FM Jaitley had admitted in his budget speech of February 28 that of the Rs 17.77 lakh crores (US$ 287 billion) of expenditure he was tabling in Parliament, less than one third was really available for innovating on the past trends and the bulk of the funds relate to liabilities already contracted before the year begins.

Given the lack of fiscal space for new commitments one would think then that the budget would be transparently split between contractual liabilities of past decisions, which are “sunk cost”- loosely defined and new budget allocations to make instant and easy sense to citizens. After all it is the “new” allocations that everyone looks forwards to, assuming that they could perturb the status quo and kick start growth.

But you will not find the budget classified thus, even though the eleven budget documents, excluding the Finance Bill, runs into 949 pages! Instead it is split between Plan and Non Plan expenses – a practice that should thankfully end now with the demise of the Planning Commission– or Revenue and Capital, another archaic distinction, which was traditionally used to track investment expenditure due to the traditional direct linkage between investment and growth. But increasingly, the right kind of revenue expenditure is also critical. Funded by the “revenue black box” are catalysts for efficiency and innovation led growth- skilled employees; functioning institutions and well maintained public assets.

The cost of feeding the public beast

How much needs to be spent just to keep government systems alive even if they do nothing of value for citizens? This is a close proxy for “current liabilities”.

First, civilian employee pay and allowances account for around 8% of total expenditure, not high at all by international standards where high, double digit proportions are the norm.

Second, expenditure on pension of government employees accounts for 5% of total expenditure but growing rapidly as ex-babu couples age and live longer.

Third, the administrative cost (providing workplaces, consumables and equipment) of managing 3.6 million civilian government employees has to be paid for. Assuming administrative cost to be one third of pay and allowances it amounts to around 3% (0.33 of 8%) of total expenditure.

Fourth, annual interest on government debt accounts for 26% of total expenditure.

Fifth, is expense on maintaining physical assets- the Achilles heel of the government. Chronic under provisioning results in axle-breaking pot holes; overflowing public toilets; broken x-ray machines and no doors or windows in classrooms. Two decades ago the PPP model for providing public services seemed like the way to go but those hopes faded.

Guess what? Maintenance expense is not transparently available as a separate line item in the budget documents. This is not surprising since the government has, inexplicably, not adopted a more complete economic classification of budget items, endorsed by the IMF and followed internationally.

Today we will have to make do with assumptions- albeit conservative ones. A God send is that ever since the promulgation of the FRBM Act the government is obliged to share an asset register of civilian assets (which excludes cabinet secretariat-a code word for India’s spooks; defence; police; atomic energy and space which together account for approximately 46% of the annual CAPEX).

The register of physical assets (excluding land) for 2013-14 values civilian assets at a measly Rs 1.87 lakh crores (US$ 30 billion) for a Rs 141.09 lakh crore (US$ 2 Trillion) economy. It seems designed, like the asset declarations of politicians, to hide more than it reveals.

Assuming a thumb rule asset value 20 times the annual capital expenditure yields a “notional” but more realistic value for government assets (other than land) of Rs 48.76 lakh crores (US$ 786 billion). Annual maintenance at 2% of “notional” asset value requires an additional 5% of total expenditure.

Just these five “tied” revenue expenses, all of which account for 47% of the total expenditure, reduce the “free play” money with the FM to 53% of total expenditure.

The drag of politics

But it doesn’t end here. Central assistance for states is what gives leverage to the PM to negotiate with state governments. In the new “cooperative federalism” framework envisaged by the PM, after the niceties are done, bargaining power will depend on the fiscal muscle the union government can flex in inter-state negotiations. How else could the PM, for example, influence the governments of Haryana and Delhi or the governments of Tamil Nadu and Karnataka to share water with the minimum of bloodletting as the searing heat of May pushes up water consumption? The 2015-16 allocation accounts for just 1% but is highly politically sensitive to change.

Subsidies on items like food, fertilizer and petroleum and interest subsidy account for 14% of the total expenditure and also fall in this category. “We need to cut subsidy leakages not subsidies themselves” is what FM Jaitley remarked in his FY 16 Budget Speech on February 28, 2015.

The “Statement of Fiscal Responsibility” tabled under the requirements of the “Fiscal Responsibility and Budget Management (FRBM) Act, 2003” unveils the FM’s hope that subsidies shall decline from 2% of GDP in 2014-15 to 1.6% of GDP in 2017-18. This could happen if annual GDP growth accelerates to the targeted 7.5% whilst the nominal amount of subsidy grows slower. But it sounds like an over optimistic assessment.

True, subsidies can be better targeted to eliminate waste and corruption. But there are also millions who are eligible for subsidy, but remain unable to access it today, because of complex administrative arrangements and poor documentation. If the JAM (Jan Dhan, Aadhar, Mobiles) inclusion initiative succeeds it will likely swell the numbers accessing subsidy. Consequently, the jury is out on the net savings that better administration of subsidy can achieve.

Accounting for the amounts committed to assistance for states and subsidies, the “play” money available to the FM reduces from 53% to 38% of total expenditure.

Funding White Elephants

The remaining 38% or Rs 7.18 lakh crores (US$ 116 billion) sounds like a lot of money. But we still have not accounted for the FMs compulsion to fund the variable costs of programs managed by the mind boggling 72 (seventy two) departments of the union government-each a fiefdom in itself.

Not accounted either are allocations for ongoing projects which are unproductive “sunk cost” unless completed and operationalized. Budget 2015-16 proposes parceling out Rs 1.11 lakh crore (US$ 18 billion) of CAPEX as grants to as many as 375 projects.

Oddly, the budget documents make no distinction between CAPEX allocations to ongoing projects and the CAPEX for new projects. Could this be because making such information public may reveal the absence of fiscal space for new projects or force government to abandon undeserving old projects?

Inefficient governments under-allocate to old projects thereby making space for announcing new ones. This makes sense politically, if sharing “pork” is the mantra of survival. But it happens at the expense of previous investment lying unutilized, worsening thereby the Incremental Capital Output Ratio- jargon for how much bang each buck buys and increases the interest burden every year as borrowed funds lie unproductively in incomplete projects.

To be sure none of this mess is of FM Jaitley’s making. But it is fair to expect him to clean it up since PM Modi’s is a government which works.

There are four initiatives the FM must launch to achieve this worthy objective.

First, he must walk the budget speech to aggressively resuscitate the PPP model and not solely because it pulls private capital into public projects. Partnering with the private sector forces the government to be efficient, effective and results oriented. Entering into explicit contracts with the private sector also makes information public, which can then be used to hold government accountable.

Second, the economic rationale behind civilian investment decisions must be made public. How are potential investments ranked? Hopefully, making the investment and economic analysis public knowledge can reduce the political noise and avoid wasteful decisions. We cannot just leave it to path breaking individual ministers like Suresh Prabhu to be punctiliously technocratic, as he was in the Railways Budget 2015-16. The weight of public opinion, via direct participation, must be institutionalized to assist the government in avoiding “bridges to nowhere”.

Third, at least ruling party MPs must commit time and effort to disseminate the logic of the budget to their constituents. It is for this purpose that Parliament takes a month’s recess during the Budget session- this year from March 24 to April 20. Have, at least, the BJP MPs fanned out to their constituencies to interact with citizens? Doing so would force MPs to understand the provisions better; come across as being well informed and initiate a more substantive dialogue at the local level. Delhi is a fish bowl in which MPs operate. Happenings here do not resonate with the rest of India automatically.

Finally, there is the appeal to save trees by reformatting the budget documents and making them shorter in length (500 pages for starters?) but more transparent in quality and to share both, the genuine constraints and the FM’s innovations to punch above his fiscal weight.